Say Goodbye to Living Paycheck to Paycheck: The Basics of Income

The Basics of Income

*This post is part of a series.  Start the series from the beginning here.

FREE DOWNLOAD of the Excel File used in this post

As with everything in life, before one can begin, they must start with a foundation, the fundamentals. Saving money is no different. Before we can start saving money and building an emergency fund, we must first know what money/ income is and how it is distributed in and out of the bank account. While this seems to be basic knowledge, there’s much more to it than having your paycheck directly deposited into your bank account and pulling the money when the bills are due.

 

The first thing to look at when working with your finances is your income or amount of money earned. It is important to note when and how often you receive your income, and approximately what amount of income you expect to receive each paycheck.

With regards to your income, you may hear the terms gross income and net income. Gross income refers to the income you make before any taxes, insurance, 401k, or any other amounts are taken out. This is not the amount of money you should use when creating your budget. Net income however, takes into account all of the pre-tax expenses and is the total amount you will have in your pocket for a given paycheck. Net income is the amount you should use for your budgeting.

The downfall to net income is that you won’t know exactly how much you are going to receive until you actually receive it. Luckily, we can use the gross income to predict how much net income will be received.

The first step to determining your net income is to state out the facts.

Are you paid per hour, per week, per month, per week?  Remember that you may be paid every other week but still be considered hourly.

Let’s determine your gross yearly income.  Choose the option below that best suits your pay type:

Hourly: Your hourly Rate * 2080 = yearly gross income.

(52 weeks/year * 40 hours per week = 2080 hours)

Weekly: Your set Rate * 52 weeks = yearly gross income

Bi-weekly: Your set Rate * 26 weeks = yearly gross income

Twice Per month: Your set Rate * 24 = yearly gross income

Monthly: Your set Rate * 12 = yearly gross income

Salary: Your salary = yearly gross income

Your Annual Gross Income

You are likely either an hourly or salaried employee but are paid bi-weekly.  This means that you either have an hourly rate ex. $10/hr and are paid for the time worked during the last two weeks or you have a set amount you are paid yearly but you are paid this amount in smaller equal portions throughout the year.

If you do not have a set pay schedule or a set paycheck amount, a good practice is to take the total pay you claimed on your previous year’s taxes and divide by 12 to see approximately how much you can expect to make each month if you follow the same pattern as the year before.

Of course, there are many other options for how one can get paid.  Just choose the option above that best fits your situation to get started.

Now that you know how to determine your gross income, you can estimate your net income.  The amount of taxes, 401k, insurance, and other deductions from pre-tax money varies greatly from person to person.

To determine how much is typically taken out of your check, gather your last three pay stubs and do this calculation for each one:

1-(Amount of Check/Gross pre-tax income)

For example:  If you made $1500 during your pay cycle but the check after deductions was for $1250, the equation would be:

1-($600/$750) = 1-0.8= 0.2 or 20%

Withholdings

Thus, 20% of your gross pay is deducted for this paycheck.  Try the equation with your other two paychecks to see if they have a similar result to the first paycheck.

If they are similar, you are good to go.  With my example, I can assume that 20% of my check will be taken out for taxes, 401k, healthcare, etc.

Let’s return to net income.  While each paycheck may vary from one another, we can now estimate how much you will get on your next paycheck.

Let’s say you are an hourly employee making $9.37/hour.  You worked 40 hours last week but this week you only worked 35 hours.  You know that your paycheck will be short but by how much?

 

Let’s start by determining your gross pay.  Using the equation above, we get:

$9.37/hour * (40 hours + 35 hours) = $9.37/hour * (75 hours) = $702.75

To estimate your net income, use your deduction percentage from above. My deduction percentage above was 20%.  I can do this one of two ways.

$702.75-($702.72*20%) or $702.75*80%

I typically choose to use the second option.  Remember that when multiplying by percentages, you may need to convert to a decimal.  20% = .2 and 80% = .8.

In our example, we have an estimated net income of $562.20.  This is the number you should use when beginning any of your budgeting.

Estimating Your Paycheck

 

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Say Goodbye to Living Paycheck to Paycheck: The Facts and Speculations

Say Goodbye to Living Paycheck to Paycheck 1

**Dreaming** Here we are, in 2016, the year of endless possibilities.  Jobs are popping up everywhere, housing prices have reached an affordable rate and families are gaining financial stability each moment.

**Wake-up Call** It’s 2016!  The housing market is still growing at an exponential rate even though it is predicted to grow at half the rate it did in 2015.  Jobs are still hard to come by and more and more families are struggling to make ends meet.  Worse off, somewhere between 40 and 76 percent of Americans live paycheck to paycheck.

Now let’s get the facts.  In 2014, the median household income was $53,657.  This is not to be confused with the average household income which I can’t even seem to find a stat on.

The median of any data set is the middle number.  So, take all of the people in America, sort them by their income then find the income of the person in the middle.  This is said to be the median income.  The average or ‘mean’ income would add all of the incomes together and divide by the population.  This number would be much higher taking into account millionaires, billionaires, and trillionaires, oh my!

Of course, there are always circumstances that can affect income and to account for this, the Census Bureau has further broken down the household incomes into Family and Non-Family households.  The median income for a Family household in 2014 was $68,426 while the median income for a Non-Family household was $32,047.

So where in this lies the poverty line?  In 2014, 14.8% of Americans lived at or below the poverty line.  But, somewhere between 40-76% of American’s live paycheck to paycheck.  Something isn’t adding up here.

It would be easy to say that if you aren’t living in poverty you shouldn’t be living paycheck to paycheck but in all reality, that’s not the truth.  There are many factors that affect a family’s bottom line including housing, transportation, education, childcare, credit card debt, and so much more.

All of these factors can make it nearly impossible to get ahead and even more so, can bring down any expectations of being able to get ahead in the future.  Que the average college student: “I’m never going to be able to repay my $40,000 loan so I should just pay the minimum for the rest of my life”.  This attitude towards debt while legitimate is just depressing.

What’s the point of going to school in the first place if you aren’t going to ever be able to get ahead.  Que the high school or college drop out.  Now, education is important but it’s not for everyone and that’s okay too.  Over the past few years I’ve personally seen many friends enter into different trades and come out way ahead of anyone who even attempted to continue with school.

And, aye yai yai.  Imagine having all these student loans piling up and then realizing you need a roof over your head.  In the Denver suburbs, the average rent for a two bedroom apartment is over $1200 per month! Rents and housing prices are so high that if I hadn’t bought my house when I did, I would be having to write a little faster to figure out how to get away from living month to month.

While I’m not a parent, I know that the average childcare costs $972 per month or $11,666 per year!  Luckily, the range is from $300 to $1564 monthly and you can choose where you would like to have your loved ones play and learn while you are at work.  But then do you choose the more expensive day care hoping for a better education or for your child to have more individualized attention or do you go for the less expensive school so you can build up that college fund?

Anyone overwhelmed yet?  Somewhere between 40-76% of American’s live paycheck to paycheck.  I would imagine that somewhere between 40% and 76% of Americans are beyond stressed and overwhelmed in correlation to their financial state.

While there is no over-night remedy for the paycheck to paycheck lifestyle, I truly believe that there is hope and possibilities for everyone out there and that with a lot of work and dedication, small steps can happen.  And from small steps come larger steps and leaps and bounds.

It’s not an easy process, but a lot of times, finding where to start is the hardest part.  Please come along on the ‘Say Goodbye to Living Paycheck to Paycheck’ series as we begin to scratch the surface and hopefully spread a bit of hope.

Go to the next post in the series here.

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Reconciling your Savings

reconciling-your-savings
Last week, we discussed how to reconcile your checking account based on your projections.  This week, we will begin reconciling the savings account as well.

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In our projections example, the first month we transfer to the savings account is April.  To reconcile this transaction, begin by reconciling the checking account the same as previous months.

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When you get to the ‘Transfer’ line, C37 in our example, we will use an equation to get the total amount to transfer.  You could also grab the transfer amount from the Projections page but I prefer to use the equation because it acts as an extra check point.

Because we want to keep $1500 in the checking account at all times, we want to transfer everything over $1500 to the checking account.

To do this, subtract $1500 from the running total.  This is the amount that you want to transfer.  Make sure to put this amount in as a negative amount since we will be taking it out of the account.

Here’s the equation:

  • =-(D36-1500)

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Add a tab titled ‘Savings’ and create the same header as we did for the checking account.  Add the Transfer as the first transaction.  Continue adding on for following months.

 

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